The Cramer Bull Trap ~ The Risk Averse Alert

Thursday, April 09, 2009

The Cramer Bull Trap

Vote this leading stock market expert at FeedTheBullThere's a problem with Cramer's "all clear" thesis. The lender of last resort is "all in." This is an unprecedented development and it is best not ignored.

That's not to say the Federal Reserve — whose balance sheet already has been inflated by nearly 200% in just north of six months time — cannot inflate ad infinitum. Ditto the furthering of Treasury's new-found, four-letter acronym, gift-of-the-month-club craze.

Still, this does not at all resemble days of old when, with a smile and the wink of an eye, Wall Street reigned supreme in a fury for securities possessing all the allure of gold. Those days are over. They ended as they always do: in an excess of supply dwarfing all the world's tulip bulbs.

Cramer's last viewer e-mail tonight caught my attention. So much hinges on the success of the PPIP if banks are to dispose of so-called "toxic assets." Might this program, indeed, meet the fate of TALF? After all, funding for the bad bank requires resources which normally come only from Congress. Yet odds the Public-Private Investment Partnerships take flight in some standard fashion are about as likely as the streets remaining tranquil if Congress even thinks of funding the program to the extent that's needed. Thus, the end-around through the FDIC. But to which fountain of boundless lending liquidity will this lead?

(Hey, did you hear the IMF bumped up to $4 trillion their estimate on toxic assets clogging the global financial system? How long ago was it they estimated $1 trillion? Does the "I" stand for incompetent?)

Let's not get too terribly excited about WFC "beating estimates," then. Trading up from $7 to $20 in just five weeks is not a stock that's on sound footing for producing solid, long-term gains. Rather, it looks like unbridled speculation and nothing more ... making Wells Fargo a prime candidate to suffer another severe spell of renewed selling pressure.

(Indeed, observing the performance of most financials over the past year, it's not hard imagining more volatility ahead considering how the trend is your friend.)


Regarding prospects for an extended market advance over the near-term ... RSI on the Volatility Index suggests a more cautious stance might be in order. It rather appears a period in which selling pressure redevelops, elevating volatility again, instead could be nearing.


Might COMP rise to its downward sloping "resistance" lying in the vicinity of its 200-day moving average? Right now, this is only 9% higher.

Contrarily, the NYSE Composite would need to rise nearly 19% to reach its 200-day moving average...


Seeing the NYSE Composite lagging NASDAQ is no big surprise. If the stock market were in the midst of a sustained turn higher, you would expect this.

Yet there's one thing curious...

Check out volume on the NYSE versus NASDAQ. If NASDAQ were, indeed, leading the market higher, then where are such "animal spirits" as should show up in a hunger to buy more shares? Where's the beef — the volume — on NASDAQ?

We'll keep an eye on this as the rally off March bottom proceeds. Chances are the market's advance will continue. Should NASDAQ reach its 200-day moving average, then turn away ... and this on relatively subdued volume, something like today ... this might go a long way toward substantiating fear I have been elaborating all week.

NYSE McClellan

Some further perspective is gained via the NYSE McClellan Oscillator. Consider the Oscillator's fluctuations since last October in relation to the NYSE Composite. As you can see, there's every reason to be on the lookout for a turn lower in the market sometime in the near future.

Might what you see isolated in green boxes suggest what still lies in store over days ahead? Might even the market's final rush higher be at hand? Or might the market pull back first?


Looks like it could go either way, wouldn't you say? I'm inclined to think the market will move lower first, then make its next charge higher. The current position of the CBOE Put/Call Ratio's RSI and MACD give this impression.

Then again ... that the Put/Call Ratio's RSI has been diverging while the market has been grinding higher over the past few weeks might be indicating quite the opposite of what I am thinking. Flip a coin. No matter which side it lands at least we know what we're looking for.

NYSE 5-min
NASDAQ 5-min

When pre-market futures this morning pointed strongly higher it seemed a safe bet indexes would trade up to the top of recent days' range, then begin tailing off. Then, when 5-minute RSI went straight through the roof at the open a pullback seemed all the more probable. Obviously this did not happen. Indeed, given price-RSI performance the rest of the day, it appears there might be no delaying the market's drive higher.

I continue to believe a top might arrive much sooner and at a generally lower level than I had been thinking likely up until this week. Of course, nothing is set in stone. Yet there is a good deal of evidence supporting this probability.

Should weakness suddenly come over the market, I rather doubt new, post-October '07 lows subsequently will be reached (which, if you recall, is precisely what I [incorrectly] thought following November '08 bottom). Nevertheless the market's March '09 lows might be "tested" sooner than many might think...

Fast Money
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